It’s tax time, and who hasn’t looked for ways to lessen one’s burden?
Perhaps that is why the recently leaked Panama Papers have struck such a nerve, as the documents seem to illustrate more evidence of tax loopholes targeted to the wealthy, including some of the world’s most powerful people. George Mason University’s Kelly Wentland, an assistant professor of accounting, has an alternative explanation for why we see this specific group of names.
“Even if it’s the case that the same tax strategies are available to all taxpayers and that both sets of taxpayers could pay the same flat fee to use these strategies, it’s unlikely you’d see more average taxpayers names on that list,” she said.
Let’s break it down: “It’s a factor of economies of scale,” Wentland said. “If any taxpayer can pay a flat, one-time fee for a tax strategy that reduces his or her tax rate by 10 percent, but higher-income taxpayers can apply it to 10 times as many dollars as lower-income taxpayers, then you’re going to see that tax strategy used more in groups of high-income taxpayers — both individuals and firms — than with the average taxpayer.”
Final thought: “It’s not obvious to me what type of effect the Panama Papers will have on the reputation of the involved firms if the transactions were legal,” Wentland said. “It’s important to note that this advantage of being a large, high-volume, wealthy company is not unique to taxes but, really, any other fixed investment cost with variable benefits.”
Kelly Wentland, assistant professor of accounting, has a PhD in business administration from the University of North Carolina. She can be reached at 703-993-5476 or kwentlan@gmu.edu.
For more information, please contact Michele McDonald at 703-993-8781 or mmcdon15@gmu.edu, or Damian Cristodero at 703-993-9118 or dcristod@gmu.edu.
About George Mason
George Mason University is Virginia’s largest public research university. Located near Washington, D.C., Mason enrolls more than 33,000 students from 130 countries and all 50 states. Mason has grown rapidly over the past half-century and is recognized for its innovation and entrepreneurship, remarkable diversity and commitment to accessibility.